(05 FEBRUARY 2019)DAILY MARKET BRIEF 1:Crude oil gains traction

Despite a rise in inventories, crude prices continue to gain ground. All three crude oil futures – Brent, WTI and Shanghai – have bounced from their lows of December 2018, up 16.13%, 20.17% and 15.03% year-to-date. OPEC’s group of 14 finally has the last word, as expectations of tighter supply is supporting prices. Recent sanctions made by the US against Venezuela’s oil giant PDVSA in order to cut President Nicolàs Maduro’s government’s main source of revenue remains a major disruption for US refiners, which count Venezuela as their third-largest supplier. Since American refineries require the use of both heavy (Venezuelan) and light (shale) barrels to produce gasoline and diesel efficiently, their output dropped by 930’000 barrels/day in January. A prolonged shortage of heavy crude would inflate oil prices, since refiners would have to either slow production or pay a premium for heavy crudes.

So we expect a rise in crude prices in the coming months. The real impact of supply shortages should not be felt on US oil inventories until spring, when production ramps up for the summer driving season. A trade truce between the US and China could have the opposite effect on oil prices, as Chinese consumption could take off, but not benefit of OPEC members. China’s engagement to increase US imports could also include crude oil purchases. Currently trading at 54.95, WTI is heading along 55.20 short-term.